Are we going to witness an historical housing price correction amid sharpest rise in unemployment and social tension?...and the minimum you should know in order to protect yourself from this downturn from an economic, stock market and political point of view... with a pinch of humor and sarcasm.

Friday, 4 December 2009

Housing Bubble to deflate end of 2010?

The ECB’s decision yesterday to end long-term emergency loans and tighten the terms of its final 12-month tender will give greater traction to any rate increases in 2010 should policy makers deem them necessary.

“The ECB chose a quicker exit path,” said Laurent Bilke, a former ECB economist now at Nomura International Plc in London. “It’s very difficult not to think it’s the beginning of a tightening process.”

...this will happen when the ECB had no other choice but to raise interest rates. It is not because the Finnish economy will do better associated with a risk of overheating, but it is because that the old economy (i.e France) seem to get out of this recession faster than thought. It is as well because states/governments are pilling up debt at alarming rate, thus one has to stop them before you get a situation where countries will not be able to service their debt and destabilize the European monetary system as a whole.

Nethertheless get ready for more shocks sometime in 2010 and see a dramatic correction in the housing and stock markets.

As far as I understand, rent have started to come down as the supply is increasing due to the decreasing of sale transaction and of course due to higher unemployment (which is predicted to continue for the optmisitic scenario until end of next year or 2011) as well as wage not rising any more at least not at the pace on the past two deacades.

I'm not sure about inventory continuying to fall. In my area, there are plenty of flat coming in the pipeline and not like the previous period the dwellings are still on sale. Today you can visit a new flat or buy it after it has been build not like during the Euphoria period.

Usually during a housing downturn, you have first a scale down of housing production as house buidler undertand that a housing downturn has started. House price generally do not correct as fast as share price since people can decide to hold onto a property if they are not forced to sell hence keeping the price stable.

However the story is different for newly build house, where builders have no choice than building or going bankrupt. So price of newly build house will tend to correct faster. The old dwelling will follow suit.

It is possible that house price could readjust quite sharply due to a suddent increase of interest rates and when you think that 90% of morgage holder in Finland have adjsutable rate (whic are at record low) you could foresee the consequences...

indeed 10% ...better than expected. this is not good for the world economy as if it is confirmed, it will require sooner than though interest rates...so...it will not allow the housing market to recover in the US and of course will push other centralbanks to raise interest rates that would be last straw to a very fragile and unstable european housing market.

So it remind me a bit of end of 2007...when euphoria started and petrol shoot up, stock market rally very strongly, consumer confidence was breaking record high ...the result was a collapse of the world economy about 12 month after...

In term of Demography, you may know that Europe has mainly been marked by the effect of the end of the second world war i.e huge baby boom during 1945-1955 . From that point you have roughly 20 to 30 years cycle that has market all the housing boom (1950, 1970, 1990, 2010).

Regarding Policy mistakes, there was clearly an interest mistakes during the 2004-2006 period where in fact you were "paid" when yo were taking a loan. By that I mean that inflation (asset price inflation) was greater than the interest you were paying. So this mistake were made almost in a synchronous manner all around the world. They were not smart (policy maker)...instead of stability they are creating lots of noise and financial instability (see petrol price fluctuation, currency fluctuation, stock and housing market) ...

Regarding my position with interest rates, the one you are referring (higher or lower)... I neither prefer one or the other. It does not affect me and I'm sure I'm not taken into hostage by the policy makers and ultimately the banks.

It is clear that when unemployment rate increase (and it will for another year or more depending on the outcome of this crisis which is very far from the end), when unemployment rate increase, housing price decline which make sense.

The same would apply if you would have a rise in interest rates that is not triggered due to a strong economy..this could happen to Finland as opposed to other European country. So my guess would be a futher correction in the housing market.

All in all we are in a very turbulent and instable market where for sure I would not advise people to commit for ...30 years! i.e take debt for such long period.

But one thing is sure, interest rates can only go one way ..and it is up so get ready for that. I think in 5-10 years it could be as high as 8% or more...

But again anybody situation is different ...but if you are first time buyer you should be very carefull and avoid listening to the bank advice and especially to those popular media or newspaper...since all they see is profit and you are just a consumer or customer...

Regarding my position with interest rates, the one you are referring (higher or lower)... I neither prefer one or the other. It does not affect me and I'm sure I'm not taken into hostage by the policy makers and ultimately the banks.

As I said in previous post, interest rates would stay low for a while maybe until end of 2010 because or even more since the economical situation doesn't warrant higher interest rates (the current economical growth is merely based on states and monetary stimulus, especially in the Asian countries) hence in Europe it has "no leg" (credit growth ro the private sector is still declining, no a good sign for a robust growth).

So my view is that it is next year where everything is going to be played. Should stimulus (artificial growth) are not removed, you may see commodity bubble developping (petrol, copper etc..) which will force policy makers to increase interest rates (obviously if they signs of companies passing through the increase to the consumers that could then spirale in demand for higher wage/strikes etc..) amid sluggish fundamental growth putting the economy to its knee, a situation they will try to avoid.

Hence, you may see higher interest rates but it will be short lived since the economy will subsequently relapse and force policy makers to lower interest rates even lower due to the instable and falling economy.

This scenario will obviously be invalidated if commodity, instead of rising decline next year.

Coming back to your question I don't favor one or the other but plead in a readjustment of asset price /economical growth / real income / demography...I still see lots of imbalance...

I will say when asset price will readjust, hopefully interest rates will be low...a little bit of what is hapenning in the US (which I have to say is the ideal situation, a 40%-60% decline in housing price with historically low interest rates...actually the same is hapenning in Ireland.)

Last with regard to where I live, stop asking the question , as I classify that as touching my privacy. So Stop asking as there will not be any answer and it is a waste of time on that blog. Another thing please put some rational when you put forward that price will rise by +10 +30%...there should be logic behind it so that I or other reader could profit from your sources, analysis and can adjust their own analysis.

Your analysis is short sighted again. BBC (which is a source I will avoid for their discriminatroy behaviour as well as their genius in distorting information).

They are comparing figures at a time when there was a total credit freeze when there was a bank run A YEAR ago (I assume this was year on year data)... I would not have been surprised to see 10000% since I would have expected historically few sales (due to lack of credit and bank keeping cash in order to avoid systemic bank run).

Again be very carefull when reading figures not put in its right context where BBC is a master of that art. Change your source and go straight to the government statistics web sites (at least in a relative basis)

in relation to the US unemployment figure (10%) - if you examine the REAL unemployment figure it has continued to rise - the US is currently somewhere in the zone of 17.5% or 18% - the figure reported by the President and media outlets only measures workers who are working - but doesn't consider discouraged workers who have stopped looking, students who have just entered the market, white collar job(s) such as doctors and other specialists (as they rarely report to the unemployment office), etc. etc.

We currently have WORSE unemployment statistics (the 18%) than we did in the beginning year(s) of the Great Depression.

Also, using the measurement of rising stock markets is a totally bogus way to measure the health of an economy - as there were more positive years in the stock market in the US during the great depression than years of decline.

We should be looking at what was done to fix the situation and what rules/laws were changed - and for the most part nothing has changed for the finance industry - or real estate. The way the government went about this - the same as they did in the US during FDR reign is Keynsian economic policies - i.e. print money and 'create' demand.

This policy is just driving the US further into debt, it hasn't created long-term sustainable jobs, and is destroying the value of the dollar.

All it has done is given a short term breather before the market could fully correct - and set the US up for a currency crisis of which I doubt there is any other solution than default through inflation.

It would have been better to just let the companies collapse and have 1-2 years of depression before a recovery - much like the depression of 1921-22 it hit with a larger drop in production and unemployment than the Great Depression (rivaling our current depression) and disappeared by 1923 - the Federal Reserve didn't intervene, there were no bailouts, and the congress didn't enact socialism to "protect" people. - it was so short that it isn't even really remembered or taught about in class, yet FDR is lauded and praised as some god figure - I suppose history goes to the victors (since the democratic party ran the school systems in the US for over half a century...)

I would thank HousingHelsinki for the wonderful platform for us to share the opinions and to learn, no matter if one agree with or to any of the opinions. I guess no one owes you or the other way around. It is up to oneself to believe whatever you would and act accoridng to it at the end...

Concerning the current situation, I guess we all are confused. It seems that the huge amount of free money can prevent a deflation or end its effects before it could start to affect. However, can we have a "bull" or "bear" future? I guess it may not be one of them. It could be a "snake" future... When it is too hungry, it could even eat itself, staring from its tail tip.